3.7 Analysing the strategic position of a business

Question 1

SWOT analysis

Answer 1

STRENGTHS –> strong brand name, skilled employees

WEAKNESS –> lots of long-term borrowing, under utilised capacity

OPPORTUNITIES –> gap in market, rising income levels

THREATS –> change in consumer tastes, competitors

Question 2

SWOT analysis - ADVANTAGES

Answer 2

Low cost and simple technique

Allows business to focus on internal & external factors

Logical structure

Helps managers recognise & assess in risks to the business

Question 3

SWOT analysis - DISADVANTAGES

Answer 3

Doesn’t take into account everything –> lacks focus

Doesn’t offer any solutions

Can become quickly out of date

Question 4

Balance Sheets & net assets

Answer 4

A balance sheet represents the businesses assets (possessions) and liabilities (debts) on a particular day

Net assets shows the what would be left to the owners if all assets were sold and all liabilities were paid –> the value of the business

Net Assets = (current assets + non current assets) - (current liabilities + non current liabilities)

Question 5

Financial Ratios - PROFITABILITY RATIO (roce)

Answer 5

ROCE shows the measure of success of a business through profit

ROCE = operating profit / total equity + non current liabilities x 100

Question 6

Financial Ratios - LIQUIDITY (current ratio)

Answer 6

Current ratio measures the ability of a business to pay its debts

Current ratio = current assets / current liabilities

Question 7

Financial Ratios - GEARING

Answer 7

Measures how much of the business is based on borrowed money

Gearing = non current liabilities / total equity + non current liabilities x 100

Question 8

Financial Ratios - EFFICIENCY RATIOS (payable & receivable days, inventory turnover)

Answer 8

Payable days = payables / cost of sales x 365

Receivable days = receivables / revenues x 365

Inventory turnover = cost of sales / average inventories held

Question 9

Value of financial ratios when assessing performance - ADVANTAGES

Answer 9

Encourages a systematic approach when analysing performance

Allows managers to evaluate companies performance and compare it to other businesses

Question 10

Value of financial ratios when assessing performance - DISADVANTAGES

Answer 10

They don’t address issues like product quality, customer service, employee morale

Ratios largely look at the past, not the future

Question 11

Core competences

Answer 11

Core competences - the unique abilities that a business possesses in order to ensure competitive advantage

Question 12

Importance of core competences

Answer 12

Allows businesses to take full advantages of opportunities to enhance performance & provide competitive advantage

Core competences add value to the business –> competitiveness and market power increases

Question 13

Criticisms of core competences

Answer 13

Over zealous outsourcing has damaged business competitiveness

Difficult to identify core competences that are genuinely unique

Possible for a business to become complacent about its core competences

Question 14

Kaplan & Norton’s Balanced Scorecard model

Answer 14

Developed to help firms measure business performance using both financial and non-financial data.

Question 15

K & N balanced scorecard model - THE 4 PERSPECTIVES

Answer 15

FINANCIAL –> e.g. revenues from sales, ROCE, cashflow

CUSTOMER –> e.g. customer satisfaction and loyalty

INTERNAL PROCESSES –> e.g. productivity, quality, unit costs

LEARNING & GROWTH –> e.g. training, employee engagement

Question 16

Balanced Scorecard - ADVANTAGES

Answer 16

Broader view of business performance

Involves everyone in the business (not just financial stakeholders)

Highly flexible

Links performance to long-term vision & goals of the business

Question 17

Balance Scorecard - DISADVANTAGES

Answer 17

Senior management may still be too concerned with financial performance

Needs to be updated regularly to be useful

Can become complicated due to their being lots of data —> therefore requires strong leadership

Question 18

Elkington’s Triple Bottom Line

Answer 18

A way of assessing business performance based on 3 important areas including:
1 )Profit
2) People
3) Planet

Question 19

Elkington’s TBL - PROFIT

Answer 19

Familiar to managers

Figures recorded in a businesses financial statements

Profit helps sustain the broader community in which the business operates within

Question 20

Elkington’s TBL - PEOPLE

Answer 20

Measures the extent to which a business is socially responsible

Takes into account :
1) Health & safety matters e.g. working conditions
2) Financial matters e.g. fair rates of pay for employees
3) Fair trade –> improving living standards in less developed countries to promote sustainable methods of production

Question 21

Elkington’s TBL - PLANET

Answer 21

Measures the impact of business on environment

E.g. A business might:
1) reduce carbon emissions
2) reduce quantity wasted
3) using sustainable raw materials

Question 22

Elkington’s TBL - ADVANTAGES

Answer 22

Encourages businesses to think beyond narrow measure of performance which is just profit

Encourages CRS pyramid

Supports measurement of environmental impact & extent of sustainability

Question 23

Elkington’s TBL - DISADVANTAGES

Answer 23

Not very useful as overall measure of business performance

Hard to reliably and consistently measure PEOPLE & PLANET

No legal requirement to report it –> so take-up has been poor

Question 24

Political Environment - ENTERPRISE (financial support)

Answer 24

Enterprise - starting & developing your own business

UK gov supports enterprises –> this encourages ppl to expand & establish their new businesses –> helps reduce the risk of it failing

Question 25

Political Environment - ENTERPRISE (non financial support)

Answer 25

UK gov provides a range of support, advice & inspiration for entrepreneurs establishing and growing their businesses E.g. guidance on recruiting staff, marketing, improving leadership

Question 26

Political Environment - REGULATION ON FREE & FAIR COMPETITION

Answer 26

Regulation - enforcement of rules 1) Imposing windfall taxes (taxes on excessive profits) 2) Controlling prices 3) Restricting ROCE --> prevents excessive profits

Question 27

Political Environment - REGULATION OF PRIVATISED INDUSTRIES

Answer 27

UK gov privatised many monopolies (single supplier in a market) e.g. gas Regulators such as OFWAT ensured: 1) consumer interests were protected 2) Monopolies don't charge excessive prices or make excessive profits

Question 28

Political Environment - IMPACT OF REGULATION

Answer 28

Threat to businesses as they can't maximise profits Adverse publicity Leads to lower risk decisions BUT can provide a more stable & long term business environment

Question 29

Political Environment - INTERNATIONAL TRADE

Answer 29

Selling goods and services to international markets Links to globalisation --> markets becoming worldwide in scope

Question 30

Political Environment - IMPACT OF INTERNATIONAL TRADE

Answer 30

Allows businesses access to wider range of customers Increased sales and lower costs too HOWEVER... there will be greater competition to deal with

Question 31

Legal Environment - COMPETITION

Answer 31

1) CARTELS - 2 or more businesses working together to limit competition e.g. controlling prices ---> leaves consumers & economy damaged 2) ABUSE OF A DOMINANT MARKET POSITION - economic strength enjoyed by a business --> enables to prevent competition 3) ANTI-COMPETITIVE PRACTICES - actions taken by business to limit rivalry within a market e.g. suppliers agreeing not to sell to competitors

Question 32

Legal Environment - INDIVIDUAL LABOUR LAW and COLLECTIVE LABOUR LAW

Answer 32

individual labour law - Relates to individual employees e.g. National Minimum Wage Act 1998 Collective labour law - Relates a trade union / group e.g. Trade Union act

Question 33

Economic Environment - GDP

Answer 33

The total value of a country's output over a given period of time Business Cycle includes 4 different stages: 1) RECOVERY - production rises, increase in consumer expenditure 2) BOOM - profits are high but so are costs, increasing inflation 3) RECESSION - demand & profit falls, interest rates are reduced 4) SLUMP - unemployment, low consumer spending

Question 34

Economic Environment - TAXATION

Answer 34

Payments made to the gov by households and businesses Direct tax --> tax on income & profits Indirect tax --> taxes on spending Different types of tax include: 1) income tax 2) VAT 3) national insurance 4) corporation tax

Question 35

Economic Environment - EXCHANGE RATES

Answer 35

Price of one currency in terms of another SPICED Appreciation - pound rises --> prices of UK exports overseas increases while prices of imported goods in the UK fall Depreciation - pound falls --> prices of UK exports overseas falls while prices of imported goods in the UK increases

Question 36

Economic Environment - INFLATION

Answer 36

Persistent rise in price for all goods and services Consumer Price Index (CPI) - measures the rate of inflation

Question 37

Economic Environment - EFFECTS OF INFLATION ON CONSUMERS

Answer 37

CONSUMERS: 1) Increase in inflation = money loses its value --> so people lose confidence in money as the value of savings is reduced 2) Increase in inflation lead to higher wage demands as people try to maintain their living standards

Question 38

Economic Environment - EFFECTS OF INFLATION ON BUSINESSES

Answer 38

ADVANTAGES: 1) Growing revenues + constant gross margin = higher gross profit 2) Higher prices enables revenues to increase DISADVANTAGES: 1) Inflation leads to increase in costs --> business may not be able to pass them onto customers 2) Inflation = higher interest rates --> reduces economic growth --> recession

Question 39

Economic Environment - FISCAL POLICY

Answer 39

Use of taxation and gov expenditure to change level of economic activity Two Types of fiscal policy: 1) EXPANSIONARY - increase level of economic activity 2) CONTRACTORY - reduce level of economic activity

Question 40

Economic Environment - MONETARY POLICY

Answer 40

Controlling amount of money / interest rates to achieve desired level of economic activity

Question 41

Economic Environment - MONETARY POLICY (impacts of rising interest rates)

Answer 41

Reduced level of consumer spending Slows down GDP growth Decreases inflation --> because people have less money to spend THEREFORE... Business may experience falling demand & sales due to increase in savings

Question 42

Economic Environment - MONETARY POLICY (impacts of falling interest rates)

Answer 42

Reduced levels of unemployment Increase in GDP growth THEREFORE... Demand & sales for businesses are likely to increase

Question 43

Economic Environment - OPEN TRADE

Answer 43

Open trade involves the removal or reduction of barriers to international trade INTERNATIONAL TRADING BLOCS - group of countries in a geographical area who aim to protect themselves from other countries outside their group

Question 44

Economic Environment - PROTECTIONISM

Answer 44

Gov policy to prevent the free entry of imports into a country E.G. 1) Tariffs - tax on imports

Question 45

Globalisation

Answer 45

Globalisation - a process in which economies have become increasingly integrated

Question 46

Importance of Globalisation - ADVANTAGES

Answer 46

1) Increased sales, revenue & profit 2) Cheaper resources 3) Economies of scale ( because of increased production

Question 47

Importance of Globalisation - DISADVANTAGES

Answer 47

1) Inflation 2) Increased need for investment --> more competition means need more efficiency and R&D 3) Threat of takeover

Question 48

Importance of Emerging Economies - STRENGTHS FOR BUSINESS'S

Answer 48

Emerging economy - a country with low income per head slowly developing through high economic growth (GDP) 1) Increase in GDP = higher disposable incomes = higher demand = increased sales, revenue and profits for a business 2) Low cost production opportunities 3) Natural resources to exploit e.g. in Brazil

Question 49

Importance of Emerging Economies - RISKS FOR BUSINESSES

Answer 49

1) Inflation 2) Protectionism from emerging countries 3) Adverse publicity = brand reputation damaged through low costs --> as employees may be exploited through low income

Question 50

Social Environment - URBANISATION and MIGRATION

Answer 50

URBANISATION - Movement of people from the countryside to live in cities e.g. may move to seek better paid employment MIGRATION - The movement of people between countries or regions

Question 51

Social Environment - IMPACT OF URBANISATION & MIGRATION

Answer 51

POSITIVES: 1) increase demand and sales for a business 2) increasingly diverse workforces NEGATIVES: 1) increased competition e.g. from overseas businesses

Question 52

Social Environment - GROWTH OF ONLINE BUSINESSES

Answer 52

POSITIVE IMPACTS: 1) lower costs if businesses starting going online 2) less employees needed --> lower unit costs 3) online businesses can reach all over the world 4) relatively cheaper NEGATIVE IMPACTS 1) Store closures --> redundancies

Question 53

Social Environment - CORPORATE SOCIAL RESPONSIBILITY (CSR)

Answer 53

The duties a business has towards its employees, customers, society and environment Level 1 - Economic responsibilities --> be profitable Level 2 - Legal responsibilities --> obey the law Level 3 - Ethical responsibilities --> be ethical Level 4 - Philanthropic responsibilities --> be a good corporate citizen

Question 54

Corporate Social Responsibility - REASONS FOR

Answer 54

Ethical thing to do Improves business reputation and brand image Attractive ethically aware stakeholders

Question 55

Corporate Social Responsibility - REASONS AGAINST

Answer 55

Businesses don't know what is in societies interests Extra costs will be incurred which must be passed on to customers Efficient use of resources may be restricted

Question 56

Social Environment - STAKEHOLDER CONCEPT

Answer 56

Purpose of a business is to create value for all stakeholders and not just shareholders. Business needs to consider and keep interests of customers, suppliers, employees, communities as well as shareholders aligned with the business

Question 57

Social Environment - SHAREHOLDER CONCEPT

Answer 57

Purpose of a business is just to meet shareholder aims mainly through maximising profits E.g. increasing share prices and dividends BUT leads to only short term profits for the business

Question 58

Competitive Environment - PORTERS FIVE FORCES

Answer 58

Analyses competitive strength of a business Includes 5 forces: 1) threat of new entrants 2) buyer power 3) supplier power 4) rivalry 5) substitute threat

Question 59

Porter's 5 Forces - THREAT OF NEW ENTRANTS (barriers to entry)

Answer 59

Barriers to entry - factors that make it difficult for businesses to sell products in a market for the first time e.g. brand loyalty If new entrants move into an industry they will gain market share & rivalry will intensify The positions of the existing firms is stronger if the barriers to entry are high HOWEVER if barriers to entry are low, then the threat of new entrants will be high The threat of a new entrant depends on: 1) customer loyalty 2) how quickly economies of scale can be achieved 3) the new entrant ability to access suppliers

Question 60

Porter's 5 Forces - BUYER POWER

Answer 60

Powerful customer are able to exert pressure to drive down prices. This is shown through buyers: 1) finding substitutes from other businesses 2) using extreme power to threaten to switch to cheaper suppliers, thus forcing original suppliers to drive down their prices

Question 61

Porter's 5 Forces - SUPPLIER POWER

Answer 61

Reasons for powerful suppliers include: 1) fewer suppliers in market makes them more powerful 2) scarce availability of substitutes gives supplier greater power If a supplier has greater bargaining power they will: - sell their products at a higher prices - squeeze industry profits

Question 62

Porter's 5 forces - RIVALRY

Answer 62

Competitive rivalry will be greater when: 1) easy for customers to move to a substitute 2) when there is little differentiation between products sold 3) competitors all have similar corporate objectives In order for businesses to compete they will: - engage in competitive pricing - use of promotional offers and special deals - use of innovation

Question 63

Porter's 5 forces - SUBSTITUTE THREAT

Answer 63

Threat of a substitute is high when: 1) when the price of a substitute product falls, it therefore makes it more attractive to customers 2) when its easier for customers to switch from one substitute to another If there are substitutes to a businesses product, the business will lower its price to keep customers, but leads to reduced profits HOWEVER...customer loyalty will limit the extent of this threat

Question 64

Investment Appraisal - CALCULATING PAYBACK PERIOD

Answer 64

The time it takes for a project to repay its initial investment Expressed in terms of time e.g. days, months or years 1) Find initial investment 2) Take 'year 1' away from initial investment 3) Repeat but with whatever the answer (x) was from step 2 4) When you can't take anymore away, put x over the last year and x by 365 to work out the days or months

Question 65

Investment Appraisal - CALCULATING AVERAGE RATE OF RETURN (ARR)

Answer 65

Looks at the total accounting return for a project to see if it meets the target return Net profit = inflow - outflow ARR (%) = total net profit / no. of years / initial costs x 100

Question 66

Investment Appraisal - CALCULATING NET PRESENT VALUE (NPV)

Answer 66

Process of analysing whether investment projects are worthwhile TIME VALUE OF MONEY --> better to receive cash now than in the future (future cashflows are worth less) AND discount factors bring cash flows back to their present value 1) Calculate PRESENT VALUE = CASH FLOW X DISCOUNT FACTOR for each year 2) Add all present values together 3) Take initial investment away from all the present values added together

Question 67

Value of sensitivity analysis - PROS AND CONS

Answer 67

The analysis of changes in assumptions used in forecasts PROS: - identifies most significant assumptions - helps assess risk and prepare for a less than favourable scenario CONS: - only tests assumptions at a time - only as good as the data on which the forecasts are based on - complicated --> not understood by all managers